Thursday, July 10, 2014

Reading :: Service-Dominant Logic

If you had told me a few years ago that I would be reading marketing books, I would not have believed you. But marketing turns out to be a fascinating and oddly parallel area of study for someone interested in professional communication—and it's also a vital field for me to understand due to the research study I'm currently conducting.

Like any other field, marketing has differences, disagreements, and controversies. One recent fissure has been in how people define the value proposition, which is (roughly) the promise of value that a good or service can offer a customer. The value proposition is often discussed, but rarely defined or investigated rigorously in the marketing literature; it's a rather vague term, like "context." But traditionally, ever since the term was first used in the 1980s, the value proposition has been understood as built into the good or service by the supplier, then offered to customers, who might then accept or reject it.

But in 2004, Vargo and Lusch published an article that challenged this understanding of the value proposition and the logic that defined it:

In their 2004 piece, Vargo and Lusch argued that marketing had assumed what they call goods-dominant logic (GDL) in which value was embedded in goods and offered to consumers. Instead, they argued, marketing should be understood in terms of service-dominant logic (SDL), in which value emerged from a dialogue among resource integrators. They and others developed this line of thinking in a series of articles. In this book, they summarize and extend the discussion further.

In Chapter 1, they argue:

Problems emerge immediately when constructing simple theories of exchange, business, and society. Arguably, the most difficult of these problems is the dominance of an institutional logic with serious limitations, which is deeply rooted in a discipline and thus monopolizes associated thought processes. One such worldview is G-D [goods-dominant] logic. This logic frames the world of exchange in terms of units of output (goods). Others have referred to it as “old enterprise logic,” “manufacturing logic,” and other, similarly descriptive tags.

G-D logic views the production and exchange of goods as the central components of business and economics. That is, it frames the purpose of the firm and the function of economic exchange in terms of making and distributing products – units of output, usually tangible. It is closely aligned with neoclassical economics, which views actors as rational, firms as profit-maximizing, customers as utility-maximizing, information and resources as flowing easily among economic actors, and markets as equilibrium-seeking – scholars within and outside economics have challenged all these perspectives. (p.4)

G-D logic, they say, developed from economics and inherited economics' focus on exchange-value, a focus that can be traced back to the limitations and peculiarities that Adam Smith dealt with in his famous treatise The Wealth of Nations (pp.6-7). But, the authors argue, Smith used exchange-value as a proxy for use-value:

The early scholars, including Smith in his original analysis of economic exchange, had it right all along: value is created at the point of what we have been calling “consumption” and, more recently, “experience”, rather than during production. (p.7)

Focusing on use-value means that we must acknowledge that "value is cocreated" among all entities involved in the transaction (p.8). That entails seeing each transaction as a service rather than a good, a service in which we must recognize "the most important resources being integrated and doing the integration – human actors with their skills, knowledge, and innovative and entrepreneurial abilities. What is needed is a logic that, rather than abandoning goods logic, transcends it, by recognizing the primacy of human resources applied for the benefit of others (and ourselves) – service" (p.8). Whereas G-D Logic saw the relationship as being between producers and consumers, S-D Logic removes that distinction: "Fundamentally, all actors (e.g., business firms, nonprofit and government organizations, individuals, and households) have a common purpose: value cocreation through resource integration and service-for-service exchange" (p.10). For instance, rather than focusing on the goods being exchanged (say, a fisherman and a farmer exchange fish for grain), we should examine the services that are involved (say, "the application of protein-producing competences for the application of carbohydrate-producing competences," p.11). "This service-oriented interpretation focuses attention on the only resource the actors really possess to take to market: their own knowledge and skills" (p.11). And thus, the authors say, we get to the key difference in understanding the business process: between "selling things to people and understanding it as serving the exchange partner's needs. This difference is a key difference between G-D and S-D logic" (p.11).

Following from this distinction are four axioms:

"Service is the fundamental basis for exchange"— implying that "(1) goods are appliances for service provision, (2) all businesses are service businesses, and (3) all economies are service economies."

"The customer is always a cocreator of value."

"All social and economic actors are resource integrators," that is, agents in combining and integrating resources to produce value.

"Value is always uniquely and phenomenologically determined by the beneficiary" (pp.15-16)

Let's pause here. When I first began reading the marketing literature to better understand the value proposition, I was struck by three things: how vague the term was, how it was understood as built into the good, and how it was consistently discussed within the dichotomy of producers (sellers) and consumers (buyers). Scholars in rhetoric and writing studies may see parallels with the term "meaning" in our field, a vague term for something that was once understood as embedded in the text, unilaterally communicated from writer to reader. Eventually, rhetoric and writing scholars shifted to the consensus that meaning is cocreated in communicative interactions: meaning was eventually seen not as a noun, a quality embedded in a material, but rather the result of a verb, an interaction across many participants and media. That is, the shift to S-D logic described in this book sounds a lot like the interpretive turn that rhetoric and writing took in the 1980s. So Vargo and Lusch's 2004 article and this 2014 book seem very familiar to me in large chunks of the argument.

Some of their cites do as well, although they don't engage with these to the extent that I think they should. For instance, they cite Callon on performativity on p.18. But Callon has much more to say about economic interactions that would be even more directly relevant: his work on interessement, for instance, could provide a strong theoretical basis for discussing how various stakeholders are locked into place around an emergent value proposition. On p.46, they cite Zuboff and Maxmin's 2002 book, pointing out that Z&M describe a shift from "enterprise logic" to "relational logic" and acknowledging that this is essentially the shift from G-D to S-D logic; but they do this through a drive-by cite rather than spending much time exploring the parallels. However, they do draw on Giddens' structuration theory (p.23 et passim), a framework that is familiar to professional communication types via Orlikowski and Yates.

This brings us back to the book's argument. Via structuration theory, the authors describe how actors create the environmental structure for their activities, and the environment then structures their future actions:

To capture these dualistic, dynamic, resource-integrating (through service exchange), enabling, and constraining value-( co-) creating structures, we use the term “service ecosystems.” A service ecosystem is a relatively self-contained, self-adjusting system of resource-integrating actors that are connected by shared institutional logics and mutual value creation through service exchange. By including shared institutional logics we point towards a link between S-D logic and structuration theory which describes human actions within social systems as enabled and constrained by social structures – that is, as contextual and contingent. (pp.24-25)

If we view things in this way, "the strategic advantage of a firm can be recast from a logic that focuses on making better products to increase market share in existing markets to one of redefining existing markets for strategic advantage or defining and thus creating new markets" (p.25). That is, the authors claim that using S-D logic pushes us away from what are elsewhere called "red ocean" markets (established commodities) and toward "blue ocean" markets (innovations).

At this point of the review, I pause and note that everything I've quoted is in the introduction. Rather than going through the entire book in this detail, I'll pull out some highlights.

First, the authors define the value proposition:

Therefore, a value proposition under S-D logic is how an actor co-proposes to positively affect another actor. This recognizes that value is obtained when an actor experiences through engagement with the firm the unfolding of the interactive market offering. Stated alternatively, firms and other actors can offer potential value through value propositions; however, they cannot create value but only cocreate it.

Value propositions are therefore promises but they must be fulfilled. Firms and actors, in general in developing exchange relationships, should view their role as offering more compelling value propositions than other competing actors but then making sure, to the extent possible, that actual value as experienced by the beneficiary meets or exceeds promised value. (pp.72)

Elsewhere, the authors argue that a value proposition is an invitation to engage (p.187). The value is always co-created, but phenomenologically determined by the beneficiary (p.187).

If the beneficiary co-creates value, we must shift from "marketing-to" to "marketing-with" (p.78). And rather than seeing relationships as B2B, B2C, etc., Lusch and Vargo therefore see all relationships as "A2A" or actor-to-actor (p.89). In Chapter 5, "It's all actor-to-actor (A2A)," the authors distinguish among different types of exchange institutions: reciprocity ("an exchange of obligations between actors," p.108), redistribution ("when an authority or central actor gathers or takes the goods and service capacity of actors and allocates back to actors according to some type of custom, tradition, rule, or simply fiat," p.109), and market exchange (in which "the actors interface to establish the value-in-exchange for tradable resources," p.110). The authors also discuss hybrid exchange systems, which combine two or more of the above. Readers of this blog may see similarities with typologies of work organization, such as Heckscher and Adler's, Ronfeldt's, and Boisot's.

I could go on and on, but you get the gist. This is an interesting and, I think, important book for summarizing the SDL position. Although it primarily functions as a summary for the growing body of work on SDL, it does also contribute some new and elaborated discussion of the position. And it's an easy read. If you have even the remotest interest in marketing, value creation, or innovation, take a look.